FINANCIAL

The Paddock Club

JANUARY 4, 2000

BY JOE SAWARD

About 15 years ago the Williams Formula 1 team was being sponsored by Imperial Chemical Industries. ICI decided one day that it wanted to lay on some hospitality for its guests at a race and rented a double-decker bus fitted out with all the necessary equipment. Williams's sponsorship coordinator at the time was Sheridan Thynne. He wanted to know where it should be parked and asked Paddy McNally, who was helping Bernie Ecclestone organize events at the time. McNally did not know and went to ask Ecclestone.

Bernie cringed at the idea. Formula 1 did not want double-decker buses. It was not the right image at all. Ecclestone and McNally decided to come up with a better idea and dreamed up something which they called "The Paddock Club". It would be an exclusive area where teams could entertain their sponsors in a tented village. The VIPs would be fed and watered by a classy Parisian caterer.

"This is not Ascot," complained Thynne when he heard the news.

"That," replied McNally, "is exactly the problem."

Today the Formula 1 Paddock Club is the ultimate in corporate hospitality. It has enjoyed such a good reputation in the sporting world that back in 1991 the organizers of the Olympic Games in Barcelona asked McNally to provide hospitality for them. He politely turned down the offer. The Spaniards did not appear to be very well organized and McNally likes organization.

Keeping things in order is an obsession with McNally, as it is with Ecclestone. He is always dressed in a blazer and tie and does not spend much time in the Paddock itself. There is too much to be done.

The funny thing is that McNally used to be a Grand Prix journalist - a breed who are not known for their organizational ability nor their sartorial elegance. He got tired of writing about the game and in the early 1970s drifted into the commercial side of the sport, first as a driver manager and then as a sponsorship consultant with Marlboro. This brought him into close contact with Bernie Ecclestone and by the end of the decade McNally was working with Ecclestone, tidying up the trackside signage at races. At the time Formula 1 was under pressure from the European Broadcasting Union to introduce standards in trackside advertising. McNally developed a system of signage which gave advertisers maximum TV exposure. He calls it "themed advertising - one brand, one corner". Ecclestone did not want every inch of space sold to sponsors and so McNally limits himself to six or seven advertisers per event. Today each of his packages (normally 16 billboards and a bridge) costs $1m. The signage is booked up for years in advance and McNally's Allsport Management company controls the sale of trackside advertising at every circuit except Monaco. You can see the difference in philosophy. At Monaco there are eight or nine different sponsors in every picture. It is colorful but not very effective.

The birth of the Paddock Club in 1984 was the next step in McNally's career. For the first race McNally and Ecclestone reckoned that they could sell 600 tickets and planned accordingly. They sold 170 tickets and made a big loss. McNally worked at the idea and by the end of 1986 was at a crossroads. He needed to invest in expensive equipment but the teams were complaining that he was taking money from their sponsors.

At a team meeting that winter Ecclestone informed the teams that McNally was going to stop running the Paddock Club. There was uproar. They had all included the Paddock Club in their presentations to sponsors. McNally stayed in business. The Paddock Club moved on the top of the pit building wherever it was possible. The Paddock Club concept was refined further with individual companies having their own areas. McLaren set the trend by decorating their area with their branding. Today Allsport does that for everyone. Ninety percent of the guests are invited by sponsors. They enjoy first class food, wines and champagne. They get guided tours of the pits, and the chance to meet the drivers. The Paddock Club has a luxurious but relaxed atmosphere. It is a place where deals can be done.

Everything in the Paddock Club is free and over the years the concept has included not only bars but hairdressing, shoeshines and even a flower stall.

Today Allsport organizes the hospitality everywhere apart from Brazil and Australia and while some estimate the number of VIPs passing through at 7000 per race, a more likely figure is around 2000. McNally makes money on all of them. The Paddock Club is very expensive - at most races it costs around $1500 per person per weekend, rising to nearly $3000 at the most popular races - but it is also very popular and has become an essential part of the Formula 1 business.

Overheads are high. Tons of equipment and people have to be transported around the world to maintain standards. In recent years McNally has sub-contracted the catering side of the organization to an Austrian firm called Do&Co, which first made its name as the inflight catering company of Lauda Air. Run by 40-year-old Turk Attila Dogudan, Do&Co employs over 600 fulltime staff and in order to maintain standards goes to incredible lengths. Bread served in the Paddock Club, for example, is cooked in Vienna, deep-frozen, and then heated up at the race tracks each morning. Do&Co has been involved in F1 since 1992 when it catered for the Hungarian GP. In 1998 the company agreed a multi-year contract with Allsport to cater for all Grand Prix races in Europe, Canada, Argentina and Japan, as well as all future F1 races in Asia. Do&Co has since been floated on the Vienna Stock Exchange.

Allsport may end up becoming a quoted company as well but for the moment McNally is busy putting together an official supplier programme for Formula 1. The various rights to supply F1 have been divided up and are now being sold off to sponsors: Siemens is the official provider of information technology, Fosters has a deal for beer supply and Mumm Cordon Rouge champagne has replaced Moet et Chandon in the Paddock Club and on the podium. Mercedes-Benz supplies the support vehicles for a Grand Prix, ranging from the highly-visible Safety Car, to the parking shuttle buses.

Since 1997 McNally has also been running a low-key Paddock Club merchandising operation, although Allsport makes more money from selling merchandising licenses at each circuit.

The relationship between McNally and Ecclestone has always been a close one but it has never been clear whether McNally pays Ecclestone for the rights he exploits or whether he pays the FIA. As Allsport is a privately-owned Swiss company the financial details are confidential. The McNally-Ecclestone links go deep. In the early 1990s, for example, when Ecclestone was struggling to make the sale of TV rights a success McNally took the risk with Ecclestone and, through a company called Allsop Parker and March, paid the FIA $37m a year for the TV rights. He made a $28m profit on that deal. Since 1997 McNally has had no part of the TV dealings but he is often mentioned as a possible chief executive for Formula 1 if Ecclestone decides to step down. Allsport is the promoter of the Austrian Grand Prix and in January 1999 McNally represented Ecclestone in talks with the Argentine authorities.

The business of F1 has made McNally rich but no-one knows how rich The Sunday Times estimates that McNally is worth about $100m but Eurobusiness magazine reckons that the figure is nearer $460m. That would suggest that Allsport is probably worth about $400m.

McNally is now in his mid-sixties and may be wanting to slow down a little. There has been talk that he will float the company but there are others who think that Ecclestone will buy the company to get complete control of the money-making operations in F1. Merging Allsport into the F1 empire would raise Ecclestone's revenues to around half a billion dollars a year and that would boost the value of Ecclestone's F1 empire from the current $2.6bn to around $4bn. He could find another buyer, make Thomas Haffa of EM.TV a quick profit and raise the value of his family's holdings still further.

If that were the case the Ecclestones would be very close to becoming the richest people in Britain...